Let me begin by congratulating Korea on its strong recovery from the global financial crisis. Korea remains one of the most dynamic economies in the world. It emerged from the worst global downturn since the Great Depression with an unemployment rate of 3.4% in 2011, less than half of the 8% rate for the OECD area; and a gross public debt of 33% of GDP, far below the 100% for the OECD area.

However, Korea also has a fundamental challenge to address: it needs to sustain strong economic growth while achieving social cohesion through a fair distribution of income. Despite impressive economic growth, income inequality and relative poverty have been on the rise during the past 15 years, although it fell in 2010 and 2011. Korea is certainly not alone in this regard -- income inequality in the OECD area has increased and reached its highest level for the past 50 years. But Korea’s experience demonstrates that economic growth by itself is not enough to achieve social cohesion.

Let me lay out three priorities for strengthening growth and achieving further convergence towards the best performing countries in the OECD area.

First, Korea needs to make better use of its labour force by increasing participation to mitigate the impact of fast population ageing. Korea is the most rapidly ageing OECD country. Its population, currently the third youngest in the OECD, is projected to be the second oldest by 2050. As a result, at current participation rates, the labour force would fall by nearly one-fifth by mid-century, while the number of elderly persons triples.

To raise labour participation, Korea must make better use of underemployed resources, notably women. The participation of women aged 25 to 54 in the labour force is the third lowest in the OECD. Increasing it requires a comprehensive approach, including reducing labour market dualism, increasing the availability of affordable, high-quality childcare and making workplaces more family-friendly. At the same time, Korea needs more flexible wage and employment systems, which would also help make better use of older workers, who tend to leave firms by age 55.

Second, Korea has much scope to increase labour productivity, which is only about half of the level of the more advanced OECD countries. To boost productivity, it is important to improve the education system, especially early childhood education, which has a large impact on performance later in life. It also requires de-emphasising university education, because university graduates have trouble finding jobs, while small and medium-sized businesses face labour shortages. Dealing with this mismatch calls for upgrading vocational education. Another issue is that universities have focused on creating more places for more students; they now need to improve the quality of the training they offer through increased competition, transparency and internationalisation.

There is also much scope for raising productivity in services, where it is only about half of that in manufacturing. Korea’s rapid economic development has been driven by manufacturing, but services have now to become a second engine of growth. A dynamic services sector requires levelling the playing field with manufacturing and strengthening competition, including by eliminating domestic entry barriers, accelerating regulatory reform, and reducing barriers to trade and inflows of FDI.

Third, green growth should be an important driver of growth. Korea has been one of the world leaders in this area since 2008, when President Lee proclaimed “Low Carbon, Green Growth” as the vision to guide Korea’s development during the next 50 years. We encourage the efforts to launch an emissions trading system in 2015 to address the problem of climate change and promote green growth. Such an approach is necessary to reduce emissions in a cost-effective manner.

Promoting social cohesion by tackling labour market dualism and better education and social protection

Let me turn now to the issue of income inequality. The main driver of a widening income gap between rich and poor has been Korea’s dualistic labour market: one-third of all employees has non-regular contracts and earns much less than regular workers. And almost two-thirds of non-regular workers are not covered by the social insurance systems. This is especially troublesome, given that non-regular workers have precarious jobs and bear the brunt of employment adjustments.

Reducing this labour market dualism is a priority for achieving social cohesion. Policy reform in this area should be comprehensive: it should focus not only on reducing employment protection for workers on regular contracts but also on improving social insurance coverage and expanding training for non-regular workers. Breaking down dualism is primarily about promoting economic growth and social justice by providing opportunities and enhancing the human capital of those non-regular workers who are now trapped in precarious jobs.

Education also has an important role to play in achieving inclusive growth. Ensuring access to high–quality pre-primary education for children in low-income households would give them a better start in life. Korea also needs to reduce the role of hagwons. Because of the strong role of hagwons, access to higher education depends on family income. This creates cycles of poverty and wealth that endure over generations. Moreover, the financial burden of hagwons discourages families from having children and contributes to the low birth rate of only 1.2 children per woman. Finally, to ensure access to university for students from low-income families, it is important to provide more student loans, with repayment contingent on income after graduation.

While reforms in the labour market and education are necessary to address some of the underlying causes of inequality, there is also a role for social policies via well-targeted social spending. Policies to assist low income should be focused on the elderly, who face higher risk of being poor.

Let me add a note of caution regarding social spending.

Public social spending is relatively low in Korea, at around 7½ per cent of GDP in 2007 against an OECD average of 20%, reflecting in part Korea’s relatively young population. But social spending has been rising fast, by 11% annually in real terms since 1990 -- the fastest rate among OECD countries. Under the current social insurance system, social spending is already likely to rise to the OECD average of 20% of GDP by mid-century.

Korea should therefore advance cautiously in developing social welfare programmes. They have to be carefully designed to avoid wasteful spending and negative externalities. They should also be targeted at those most in need rather than provided universally.

Revenue increases should follow higher social spending to maintain Korea’s low public debt ratio. This is indispensable given the potential cost of possible rapprochement with North Korea, in addition to the most rapid ageing in the OECD area. But financing higher social spending by hiking taxes should avoid increasing the tax burden on labour income and discouraging work. Instead, relatively non-distorting taxes, such as the value-added tax and environmental taxes, should therefore be the main sources of revenue. Korea’s VAT rate is currently 10%, far below the OECD average of 18%. Environmental taxes raise already close to 3% of GDP, which is above the OECD average, but there is room for further increases.

Ladies and Gentlemen,
Korea has an impressive economic track record. Sustaining such performance will become more difficult because of rapid population ageing. Making growth fairer and greener is another important challenge.

Our 2012 Survey of Korea lays out a strategy to sustain strong growth while promoting social cohesion and focuses on education and labour market policies that will help achieve both objectives. We look forward to working with Korea in designing and implementing these policies and making the Korean economy stronger and more inclusive.

We aspire to an even closer co-operation with Korea to develop better policies for better lives.
Thank you.